Stampa cited the outcome of an ECB inspection, focusing on uncertainties from the bank's planned bad loan reduction. The Italian daily noted that the ECB had communicated results of its inspection to the bank last week, noting that losses are now expected to be well above those calculated until now. Specifically, while the proposed €8.8BN recapitalization would be sufficient to take the bank's CET1 above the required regulatory level, it would not be sufficient to meet the ECB SREP requirements, raising the risk the government will have to contribute more than the €6.6BN currently envisaged.

But while Monte Paschi continues to be a perpetual drain of taxpayer funds, the most imminent threat facing the Italian economy comes not from the banking sector, but from its just as troubled national airline carrier. Last week, Alitalia said it had exhausted all options after workers voted against job cuts aimed at salvaging the cash-strapped Italian airline, pushing it toward administration for the second time in a decade.

According to Bloomberg, a €2 billion recapitalization tied to the savings plan is effectively dead and Alitalia would start appropriate “legal procedures” as funds run out, the Rome-based airline said. Chairman Luca Cordero Di Montezemolo “formally” communicated to the Italy aviation authority that the carrier decided to start the process of naming a administrator, the authority said on its website last Tuesday.

The decision to appoint an administrator is the first step for being placed in a legal reorganization process, making it almost impossible a last-minute rescue of the carrier as it exists today.

Meanwhile, unlike Italian banks which get bailed out any time there is even a modest threat of a bank run, typically with ECB assistance, Italy has said it won’t nationalize Alitalia whatever the circumstances. Abu Dhabi-based Etihad, the carrier’s main backer, said the employees’ rejection means “all parties lose,” and that it supports the board’s move to hold a shareholders’ meeting Thursday “to start preparing the procedures provided by law.”

“The most likely scenario is that we will go towards a short period of special administration that may be concluded within six months with a partial or total sale of Alitalia’s assets or with liquidation,” Economic Development Minister Carlo Calenda told TG3 in a television interview late Tuesday.

An Alitalia bankruptcy would be its second in under a decade: the company was last put into bankruptcy in 2008 after political and labor opposition thwarted sale plans, and has stumbled on since, with ties to Air France-KLM Group and Etihad Airways PJSC failing to end losses.

While Bloomberg's take was relatively benign, saying that while a complete collapse would have an inevitable impact, the carrier is less central to Italy’s economy than before, after shrinking its long-haul network and losing market share to low-cost rivals on European routes, today Italian officials disagreed, and warned of dire consequences for the economy should Alitalia be allowed to collapse.

Cited by Reuters, Calenda said on Sunday that a sudden collapse of the loss-making national carrier "would be a great shock for Italy's economy." Rome has given the crisis-hit airline a short-term lifeline, a bridge loan of up to €400 million to see it through a process whereby an administrator will decide if it can be sold as a going concern or should be liquidated.

However, it is the worst case outcome that has Italian government officials spooked. "A [sudden closure] would be a shock for GDP much greater than the scenario that we are looking at: a brief period of six months covered by a bridging loan from the government so as to find a buyer who could provide services that Italians need as travelers," he said in an interview with Sky TG24 television.

Making matters worse, rival airlines have shown little interest in buying Alitalia and creditors have refused to lend more money after workers last Monday rejected the abovementioned rescue plan that would have reduced pay and cut 1,700 jobs. It is unclear how yet another "shock" to Italy's GDP would reverberate across Europe, which as we showed last week, has just hit its latest downward inflection point, with upcoming economic data set to disappoint according to Deutsche Bank.

Europe's "economic peak" also comes as the dynamo of the global reflation trade, China, just reported its worst PMI survey data in 6 months, despite a record credit injection in the first quarter, suggesting China's unprecedented credit impulse is wearing off not only domestically, but also internationally.

Which means that for watchers of European deflationary inflection points, in addition to monitoring the perennially troubled Italian banking sector, one should also pay attention to legacy companies such as the national carrier, and how its bankruptcy would ripple through the country, especially if Carlo Calenda is right, and the outcome is nothing short of a "shock" for the domestic economy.